2018 (11) TMI 130 - AT - Income Tax

Tribunal Partially Allows Appeals on Tax Issues, Directs Deletion of Additions

AT & T Communication Services (India) P. Ltd. Versus DCIT, Circle-3 (2), New Delhi

AT & T Communication Services (India) P. Ltd. Versus DCIT, Circle-3 (2), New Delhi - TMI Issues Involved:1. Adjustment on outstanding receivables from associated enterprises (AEs).2. Disallowance on account of statutory liabilities payable.3. Disallowance of year-end accruals.4. Addition on account of non-charging of mark-up on support service charges billed to AGNSI.5. Addition on account of non-deduction of tax at source on reimbursement made to AT&T World Personnel Services Inc. (AWPS).Issue-wise Detailed Analysis:1. Adjustment on Outstanding Receivables from Associated Enterprises (AEs):The appellant company, a wholly-owned subsidiary of AT&T Communication Services International Inc., USA, had international transactions with AEs, which were considered at arm's length by the Transfer Pricing Officer (TPO). However, the TPO re-characterized outstanding receivables from AEs as loans and imputed notional interest, leading to an upward adjustment of Rs. 7.84 crore. The Dispute Resolution Panel (DRP) reduced this addition to Rs. 2,85,19,002/-. The Tribunal observed that outstanding receivables do not constitute a separate international transaction requiring separate benchmarking, as they are embedded in the main transaction of 'Provision of Network Support Services.' The Tribunal noted that the appellant did not charge interest from non-AEs either and that the working capital adjustment was already factored into the operating margin. Following the jurisdictional High Court's decision in Kusum Healthcare Pvt. Ltd., the Tribunal directed the deletion of the addition of Rs. 2,85,19,002/-.2. Disallowance on Account of Statutory Liabilities Payable:The Assessing Officer (AO) disallowed Rs. 58,60,552/- under section 43B of the Act, as service tax payments of Rs. 6,90,777/- were made after the due date of filing the return. The appellant argued that the output service tax payable and input service tax credit were not routed through the Profit & Loss Account. The Tribunal found that the AO did not properly appreciate the accounting entries and restored the issue to the AO for verification and fresh decision, treating the ground as allowed for statistical purposes.3. Disallowance of Year-End Accruals:The AO disallowed Rs. 1.58 crore out of year-end accruals, as the appellant did not have invoices for the same and could not substantiate utilization/reversal of such accruals in subsequent years. The appellant argued that it followed the mercantile system of accounting and that year-end accruals were reversed when invoices were received/paid in subsequent years. The Tribunal, following its decision in the appellant's own case for the assessment year 2010-11, held that expenses with a substantial degree of estimation should be allowed in the year of creation itself and ordered the deletion of the addition.4. Addition on Account of Non-Charging of Mark-Up on Support Service Charges Billed to AGNSI:The AO made an addition of Rs. 1.84 crore on account of non-charging of mark-up on support services provided to AGNSI, a group company, based on the previous year's addition. The Tribunal noted that similar additions were deleted in the appellant's own case for the assessment year 2010-11, as there was no tax loss to the Revenue and the arrangement between two resident entities cannot be questioned unless specifically provided under the Act. The Tribunal directed the deletion of the impugned addition.5. Addition on Account of Non-Deduction of Tax at Source on Reimbursement Made to AT&T World Personnel Services Inc. (AWPS):The AO disallowed Rs. 4,17,56,851/- under section 40a(i) of the Act, treating the reimbursement to AWPS as Fees for Included Services (FIS)/Fee for Technical Services (FTS) under the Indo-US DTAA and section 9(1)(vii) of the Act, relying on the Delhi High Court's decision in Centrica India Offshore Pvt. Ltd. The appellant argued that the seconded employees were under its control and supervision, and the payments were subject to TDS under section 192 of the Act. The Tribunal concluded that the seconded employees were effectively working as employees of the appellant company, and the provisions of section 195 were not applicable. The Tribunal directed the deletion of the impugned addition, distinguishing the facts from the Centrica case.Other Findings:- For the assessment year 2011-12, the Tribunal followed its findings for the assessment year 2012-13 on the issues of mark-up on support services, year-end accruals, and statutory liabilities, allowing the grounds accordingly.- The transfer pricing adjustment of Rs. 1,10,99,474/- for the assessment year 2011-12 was deleted by the AO under section 154 of the Act, rendering the ground infructuous.Conclusion:The appeals were allowed in part for statistical purposes, with directions for deletion of certain additions and remand for verification of statutory liabilities. The decision was pronounced in the open court on 31.10.2018.